Easy-to-keep New Year resolutions

NET WORTH

Easy-to-keep New Year resolutions

ANDREW WOOD

Have you made your New Year resolutions yet? It's never too late and if you think carefully you may want to have a look at your wealth management from a couple of different perspectives. You may then want to implement something this year to ensure you take advantage of some simple but effective advantages.

In creating wealth by saving there are some factors that many of you are unaware of. The factors outlined below will assist you in reaching your wealth targets quicker and in achieving greater levels of wealth on which you can enjoy earlier retirement or a higher standard of living from your current expectation.

There is a factor in wealth creation called the cost of delay. This is a simple concept and is a calculation to see how much longer it would take to create a wealth pool in a specific time period and the additional cost if you delay the implementation for, say, a year or more. Let's say you are 40 now and want to create a retirement fund to begin withdrawals at age 65. You can afford to save 12,000 per year. If you invested regularly in a savings plan producing returns of 10% per year, in 25 years' time you would have a fund of 1,296,386.

However, if you delayed the start by only a year, in order that you achieve the same fund at age 65 you would need to save 13,335 per year. For a two-year delay you would need to save 14,837 per year. Conversely, had you started saving a year earlier you would only have had to save 10,810 per year. The differences are quite significant.

Next let's look at compound interest. If you still saved your 12,000 per year for 25 years at an average growth rate of 10%, you would achieve a total of 1,296,386. If the growth rate were to average only 6% the total fund would be 697,165. This is staggering. If the growth rate were to average 8% the fund would be 946,318.

So if you combine the two factors there can be some really surprising differences in the results you can achieve and also some stunning results if you delay and achieve less growth than you had hoped.

For many of you, an amount of 12,000 savings per year is rather high. When you look at the realities of what you would require as a pension fund when you retire this savings amount could be too low. If you were to retire on an income in today's terms at a modest level of, say, 30,000 a year, using our same example and taking a projected inflation rate of 4% per year, you would require an annual income of 79,975 by the time you retired in 25 years' time. Your pension fund of 1,296,386 would last you only 16 years.

Remember that inflation never takes a holiday and after you retire you will require ever-increasing pension income to keep up with inflation. The calculations used here have assumed your pension fund will continue to grow at a modest level of 6% per year and inflation continuing at 4% per year.

This is certainly daunting for many of you but do not lose hope. By starting now and not suffering any further cost of delay you can at least commence or even add to your existing pension fund on a regular basis. If the amount of required savings seems too much for you, maybe you should start at the level you can afford today. This can be increased little by little as time goes by and by using the hidden factors of compound interest and negating the cost of delay you will be surprised at just how your pension pot will actually grow over time.

A further example of this may be a plan to save, say, 6,000 per year and increase the amount you save each year by say 10%. That means in Year 2 you would save 6,600, and so on. The pot you would achieve in 25 years would amount to 1,624,308. Taking our same pension requirement example, that fund would last you a total of 20 years in retirement.

There are, of course, many permutations of this example and if you feel you want to start a savings strategy and plan a retirement fund you would be well advised to see your independent professional financial adviser. He will be able to help you create a strategy and help you toward your goal.

Of course, retirement is not the only reason we save. Many of you have children whom you are planning to fund for tertiary education. In analysing these costs and the requirement for savings, many of you would be even more astounded. Education costs are generally inflating at an average rate of 7.5% per year and if there is more than one child involved it can seem prohibitive. When you add the retirement planning requirements into the equation, the picture can seem bleak. These are even more reasons for you to start providing yourself a fund for the future now.

Questions to the author can be directed to Barclay Spencer International on 0-2653-1971 or e-mail to info@barclayspencer.com